How To Calculate A Price Of A Good

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1 ECONOMIC EFFICIENCY, ENVIRONMENTAL EFFECTIVENESS AND POLITICAL FEASIBILITY OF ENERGY EFFICIENCY REBATES: THE CASE OF THE SPANISH ENERGY EFFICIENCY RENOVE PLAN. Ibon Galarraga, Lus M. Abade and Alberto Ansuateg 5 th Atlantc Workshop on Energy and Envronmental Economcs A Toxa, 2012

2 Overvew 1. Energy labellng and the RENOVE subsdy scheme: some background 2. Research dea 3. Methodology 4. Results 5. Concludng remarks 2

3 1. Energy Labellng and the RENOVE subsdy scheme Energy labellng s acqurng a major mportance n the lght of the EU Clmate and Energy package that sets the target of reducng energy consumpton by 20% by The goal of a 27% energy savng n the resdental sector (European Councl 2006). Drectve 92/75/ECC regulated nformaton on energy and other resources consumpton n household applances. Snce 2008 a Proposal for a Drectve of the European Parlament and of the Councl on the ndcaton by labellng and standard product nformaton of the consumpton of energy and other resources by energyrelated products SEC (2008) 2862 has been under revew. 3

4 1. Energy Labellng and the RENOVE subsdy scheme In many countres subsdes are used to support labelled goods. The RENOVE program s the Spansh polcy. Regulated by Royal Decree 208/2005, 25 February 2005, on electrcal applances and electronc devces and the management of ther wastes. Set up by the Insttute for Energy Dversfcaton and Savng (IDAE, Insttuto para la Dversfcacón y el Ahorro Energétco) But run and managed by the Energy Boards of the Autonomous Communtes (AC). Sets a mnmum of 50 as a lump sum subsdy to consumers (both publc or prvate) wllng to purchase (exchange) hghly effcent durables,.e. labelled as class A or hgher; Some AC have ncreased ths premum to and more. 4

5 2. Research dea How do polcy makers estmate how much s the optmum subsdy? Do they fne tune the program each year accordng to an evaluaton? How can we measure the mpact of the scheme? We need to know how much people are wllng to pay for those labels. Economc valuaton technque. Queston A. And we also need prce elastctes of demand and supply to properly assess the mpact of the polcy. How can be estmate them? Queston B. We can measure the mpact of the scheme and perhaps propose alternatves (?). Queston C. 5

6 2. Research dea Answer to A and to B n: Galarraga, I, Heres, D. and González-Eguno, M. (2011), Prce premum for hgheffcency refrgerators and calculaton of prce-elastctes for close-substtutes: Combnng Hedonc Prcng and Demand Systems. Journal of Cleaner Producton. Galarraga, I, González-Eguno, M. and Markandya, A. (2011), Wllngness to pay and prce elastctes of demand for energy-effcent applances: combnng the hedonc approach and demand systems. Energy Economcs, vol 33 pp Answer to C: Welfare analyss of proposed polcy and other proposals. A subsdy for energy effcent applances.(exstng polcy!) A tax for non-effcent applances. A combnaton of an small tax on non labelled ones that fnances a subsdy on labelled ones. (Bonus-Malus type of approach). 6

7 2. Polcy proposal Three prncples: Economc effcency To reduce the welfare losses of the polcy optons,.e. dead weght losses. Envronmental effectveness Not to ncrease the energy bll, that s, no rebound effect. Poltcal feasblty Balanced polcy, should not generate any defct. Settng the ground: We frstly analyse the mpact of the ongong polcy opton (Energy-effcency Rebates) accordng to n these three prncples. We then analyse alternatves that comply wth the three polcy prncples. Fnally, several other optons are studed. 7

8 3. Methodology: Effects of polces The effect of a subsdy n labelled goods: when the prce of labelled goods decreases (shft n supply) the demanded quantty ncreases and the demand for nonlabelled ones Fgure decreases 1: The Effect (substtuton of a Subsdy on effect). the Far Trade We Coffee need Producton nformaton on demand (and supply) elastctes! FT S 0 a FT S 1 OT S FT P 0 FT P 1 b c FT D OT D 1 OT D 0 FT Q 0 FT Q 1 OT Q 1 It generates a DWL n the labelled good market and a loss of welfare n the non-labelled ones as a consequence of the reducton n the quantty demanded. Fnal outcome s an ncreased loss of welfare comparng wth a stuaton where no substtute exsts. OT Q 0 8

9 3. Methodology: Effects of polces The effect of a tax n non-labelled goods: when the prce of non-labelled goods ncreases (shft n supply) the demanded quantty decreases and the demand for labelled Fgure 2: The Effect of a Tax on the other dshwashers ones ncreases (substtuton effect). We need nformaton on demand (and supply) elastctes! O S 1 a O S 0 L S O P 1 b O P 0 c OT D L D 0 L D 1 O x 1 O x 0 It generates a DWL 4.2. Calculatons n the non-labelled and Values good Used market and a welfare GAIN n the labelled one as a consequence of the ncrease n the quantty demanded. Fnal outcome s an reduced loss of welfare comparng wth a stuaton where no substtute exsts. L x 0 L x 1 9

10 3. Methodology: Mathematcal llustraton x = f( P, Pj, m) = 1,2 (1) x = g( P, Pj ) = 1,2 (2) These demand and supply functon can be now approxmated as constant elastcty functons. x x µ j j η1 = P P m = 1,2 µ (3) ε j j = P P = 1,2 ε (4) where µ s the own prce demand elastcty for product, µ s the cross prce demand elastcty, j ε s the own prce supply elastcty for good, ε s the cross prce supply elastcty and j η s the ncome elastcty of the th product. By dfferentatng equatons (3) and (4) and usng proportonal notaton we can obtan the followng equatons: Ex = µ EP + µ jepj j + η Em = 1,2 (5) Ex = EP + ε EP = 1, 2 ε (6) j j j where E prefx stands for the proportonal change n the varable. 10

11 3. Methodology: Mathematcal llustraton The ntroducton of a tax (subsdy) as a proportonal change n the supply of the product taxed (subsdsed); 1 εj Ex EP EPj ε ε = dp P = 1,2 (7) The change n ncome due to the tax (subsdy) s equal to the quantty consumed of such quantty tmes the prce change orgnated by the tax (subsdy). That s, dm = x dp. By ntroducng the proportonate change; Em = w EP = 1,2 (8) where w stands for the expendture share of good. The dead weght loss, Damond & McFadden (1974) as, DWL = ( X 1 X 0 ) * dp *0.5 1 j= 1 ( X 1 j X 0 j ) * dp j (9) 0 1 where X s the quantty before the tax (subsdy), X s the quantty after the entre tax (subsdy) for has been ntroduced. 11

12 3. Methodology: Values used Elastctes of demand: QDBS ( e e = 0. 4 e = 1) O = L X / X Prce Elastcty cross O/L ( own for L ( cross L/O ( of demand own O/O ( ) ) ) ) Source Galarraga et al. (2011). Elastctes of supply: Some well-guessed supply elastcty values, these are: An own prce elastcty of supply for other applances of 1.5, an own prce elastcty of supply for labelled ones of 1.2. The latter more nelastc. Intal equlbrum prces and quanttes: Product Orgnal Quanttes (Unts) Orgnal average Prces (Euro) Non- labelled dshwashers (60%) A+ Labelled dshwashers (40%) Source: Galarraga et al. (2011) 21, , =594 12

13 4. Results: (1) Results of a 80 subsdy Market Segment Orgnal Quanttes Orgnal Prces ( ) Polcy Quanttes Polcy Prces Change n Quant. (%) Change n Prces (%) Balance of the polcy ( ) Welfare loss ( ) Energy savngs ( ) A+ Labelled dshwasher s (40%) Nonlabelled dshwasher s (60%) 12, , , , Subsdy Cost -1,036, , , , Total 33,680-34, , There s a rebound effect due to the ncrease n the total number of applances. Although more effcent applances the ncrease n the total number generates an ncrease n the energy bll. The polcy has a cost of 1M. Generates a DWL of 26,

14 4. Results: (2) Polcy alternatves Is a tax a better nstrument? Results of a 40 tax Market Segment Orgnal Quanttes Orgnal Prces ( ) Polcy Quanttes Polcy Prces Change n Quant. (%) Change n Prces (%) Balance of the polcy ( ) Welfare loss ( ) Energy savngs ( ) A+ Labelled dshwashers (40%) 12, , Collected 829, , , Non-labelled dshwashers (60%) 21, , , ,680 33, , Total There NO rebound effect. In fact there s energy savng. The polcy collects money. And t generates a much lower DWL. Can we mprove ths? What about tax and subsdes at the same tme. 14

15 4. Results: (3) Polcy alternatves Malus-bonus type of approaches S(+) ES(+) DWL>25,800 15

16 4. Results: (4) Polcy alternatves Results of a 30 subsdy and 20 tax (wth ncome effect) Market Segment Orgnal Quanttes Orgnal Prces ( ) Polcy Quanttes Polcy Prces Change n Quant. (%) Change n Prces (%) Balance of the polcy ( ) Welfare loss ( ) Energy savngs ( ) A+ Labelled dshwasher s (40%) Nonlabelled dshwasher s (60%) 12, , Collected 7, , , , , , Total 33,680-33, , There NO rebound effect. In fact there s energy savng. The polcy collects money. And t generates a much lower DWL. 16

17 4. Results: (5) Polcy alternatves Results of a subsdy and tax (wth ncome effect) Market Segment Orgnal Quanttes Orgnal Prces ( ) Polcy Quanttes Polcy Prces Change n Quant. (%) Change n Prces (%) Balance of the polcy ( ) Welfare loss ( ) Energy savngs ( ) A+ Labelled dshwasher s (40%) Nonlabelled dshwasher s (60%) 12, , Collected 25, , , , , Total 33,680-33, , There NO rebound effect. In fact there s energy savng. The polcy collects money. And t generates a lower DWL. 17

18 4. Results: (6) Polcy alternatves Results of a 60 subsdy and 30 tax (wth ncome effect) Market Segment Orgnal Quanttes Orgnal Prces ( ) Polcy Quanttes Polcy Prces Change n Quant. (%) Change n Prces (%) Balance of the polcy ( ) Welfare loss ( ) Energy savngs ( ) A+ Labelled dshwasher s (40%) Nonlabelled dshwasher s (60%) 12, , Collected 16, , , , , , Total 33,680-33, , There NO rebound effect. In fact there s energy savng. The polcy has a cost. It generates a lower DWL. 18

19 4. Results: (7) Polcy alternatves Results of a 70 subsdy and 90 tax (wth ncome effect) Market Segment Orgnal Quanttes Orgnal Prces ( ) Polcy Quanttes Polcy Prces Change n Quant. (%) Change n Prces (%) Balance of the polcy ( ) Welfare loss ( ) Energy savngs ( ) A+ Labelled dshwasher s (40%) Nonlabelled dshwasher s (60%) 12, , Collected 164, , , , , , Total 33,680-32, , There NO rebound effect. In fact there s energy savng. The polcy collects 0.8 M. But t generates a much hgher DWL. 19

20 5. Concludng remarks As a consequence of the subsdy scheme the total number of dshwashers at the market ncreased n 1%: The labelled ncreased by 5% as a reducton n the equlbrum prce of 9%. 0.5% prce reducton n equlbrum prce reduces the quantty of non-labelled ones by 1%. Net cost of 1 M euro. And as a consequence of the ncrease n the number of applances there s an ncrease n the energy bll of 196,000. Ths can nterpreted as the cost of the rebound effect. (?) If nstead a 40 tax s mplemented the total number of applances wll be reduced by 1.6% (and no rebound effect wll be expected for ths reason generatng an energy savng of 0.3M ) whle collectng 0.8 M. DWL half of the subsdy. When all cross effects are taken nto account the equlbrum prce wll be 6% hgher for non-labelled dshwashers (wth a 2.6% decrease n demanded quanttes) and 0.5% for labelled ones (wth a 0.6% decrease n quanttes). 20

21 5. Concludng remarks Fnally, the paper proposes combnatons of both nstruments (subsdes that could be fnanced by smaller taxes on non-labelled market). One reasonable combnaton can be subsdy 30 and a tax of 20. Ths can be justfed n terms of ethcal belefs, as the users of non effcent applances should be the ones compensatng the consumers that opt for effcent applances nstead of all socety. But also n terms of the three prncples. When (30,20) s mplemented there s an nsgnfcant change n the total applances demanded (less that 1%) whch s explaned by a 2.21% ncrease n labelled segment and a 1.69% decrease n nonlabelled one. The net result of the polcy s a surplus of 42,000 and a modest energy savng s also generated. Comples wth the three prncples. Ths polcy s llustratve of what can be done wth the methodology proposed n the paper when both own and cross prce elastctes are avalable. 21

22 5. Concludng remarks Fnally, the paper proposes combnatons of both nstruments (subsdes that could be fnanced by smaller taxes on non-labelled market). One reasonable combnaton can be subsdy 30 and a tax of 20. Ths can be justfed n terms of ethcal belefs, as the users of non effcent applances should be the ones compensatng the consumers that opt for effcent applances nstead of all socety. But also n terms of the three prncples. When (30,20) s mplemented there s an nsgnfcant change n the total applances demanded (less that 1%) whch s explaned by a 2.21% ncrease n labelled segment and a 1.69% decrease n nonlabelled one. The net result of the polcy s a surplus of 42,000 and a modest energy savng s also generated. Comples wth the three prncples. Ths polcy s llustratve of what can be done wth the methodology proposed n the paper when both own and cross prce elastctes are avalable. 22

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